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Busting the “Myth” of the U.S. Manufacturing Renaissance

Posted February 03, 2015

A report published last month by the Information Technology & Innovation Foundation (ITIF) challenges what it claims to be the “myth” of America’s manufacturing renaissance, an imminent phenomenon that has been widely touted by pundits, certain business consultants and the mainstream media in recent years. According to that narrative, U.S. manufacturing has “turned a corner and is roaring back after the precipitous decline during the 2000s” owing to a combination of factors including higher foreign labour costs, cheap domestic oil and gas, and advances in automation.

The non-partisan group’s research however suggests that the data does not support such a rosy scenario. Contrary to there being a domestic manufacturing resurgence, it indicates that at the end of 2013 real manufacturing value added was still more than 3% below pre-recession levels, despite GDP growth of 5.6% and there are still 2 million fewer jobs and 15,000 fewer manufacturing establishments than there were in 2007. Much of the growth since 2010 the report suggests appears to be the result not of any significantly improved competitiveness, but merely “cyclical recovery as demand, particularly for motor vehicles and other durable goods, returns.” Although certainly increasing in recent years, the reshoring numbers the ITIF authors say are relatively “modest” and, more concerning, the manufacturing sector is still sending jobs overseas at roughly the same rate – a state of affairs which they wryly note is “hardly indicative of a renaissance.”  

During the previous decade, U.S. manufacturing employment shed almost 6 million jobs, or about one-third of the workforce, an unprecedented loss that, unlike the prior two decades, was caused not principally by superior productivity growth as is often claimed by some industry groups, but the report contends by “significant losses in real value added output.” Additionally, the report dispels the somewhat mythical notion that manufacturing was only being shed in the more commodity type products in order to focus on high value-added and advanced products, noting that while lower-end manufacturing work has indeed been lost in great numbers, very little in the way of offsetting gains have been made at the high end.

The report’s authors posit that much of the renaissance narrative is “based around several misconceptions about U.S. cost advantages, including incorrect assumptions surrounding Chinese wage growth and productivity, global shipping costs, the role of the U.S. dollar, the importance of the shale gas-driven energy boom, and American productivity growth.”  Each of these misconceptions are addressed and refuted. For example, with respect to the contention that China’s rising labour costs will soon match U.S. wages the report indicates that while rising rapidly, Chinese wages are still estimated to be just 12% of average U.S. wages in 2015. Chinese labor productivity growth and its infrastructure push to open that country’s interior for production reduces the impact of Chinese wage growth, the report says.

The report concludes by noting that “Conditions for U.S. manufacturing are certainly better than they were a decade ago, as employment and output are both growing, albeit slowly. Despite this improvement, there is not yet evidence to support the notion of a U.S. manufacturing renaissance.” It warns that “The optimistic message of the manufacturing renaissance provides the public, business leaders, and policymakers with a dangerous sense of complacency that reduces the urgency and necessity for Congress and the administration to take the bold steps needed to truly and sustainably revitalize American manufacturing.”

Click here to download the report.